MARCH 26 2010

Carmen M. Reinhart, Kenneth S. Rogoff, NBER: From Financial Crash to Debt Crisis. Newly developed long historical time series on public debt, along with modern data on external debts, allow a deeper analysis of the cycles underlying serial debt and banking crises. The evidence confirms a strong link between banking crises and sovereign default across the economic history of great many countries, advanced and emerging alike. The focus of the analysis is on three related hypotheses tested with both “world” aggregate levels and on an individual country basis. First, private debt surges are a recurring antecedent to banking crises; governments quite contribute to this stage of the borrowing boom. Second, banking crises (both domestic ones and those emanating from international financial centers) often precede or accompany sovereign debt crises. Indeed, we find they help predict them. Third, public borrowing accelerates markedly ahead of a sovereign debt crisis; governments often have “hidden debts” that far exceed the better documented levels of external debt. These hidden debts encompass domestic public debts (which prior to our data were largely undocumented).

Clemente De Lucia, BNP Paribas: Financial crisis and potential output. If the crisis were to lead to a new “equilibrium” with higher public debt, this would mean that sooner or later the level of taxation has to be increased, with negative effects on growth perspectives. Note that demographic developments are already exerting downward pressure on potential output. By contrast, the crisis could even trigger an acceleration of structural reforms in the eurozone. Making eurozone product and labour markets more flexible and more open to competition could increase growth prospects, creating the conditions for a “full recovery”. Under this more optimistic scenario, the level of potential output returns to its pre-crisis period. Finland, which faced a serious banking crisis in the early 1990s, is an example of output recovering completely from losses due to financial distress.

Ben Steverman, Business Week: Corporate Balance Sheets Show Surprising Strength. Despite a harsh recession and alluringly low interest rates, many companies have shrunk debt and other obligations over the past year U.S. large-cap companies have survived the recession without taking on loads of new debt. According to an analysis of Bloomberg data on nonfinancial companies in the Standard & Poor's 500-stock index, the average large-cap company has shrunk liabilities on its balance sheet by 8.2%. The liabilities on a company's balance sheet include its debts, as well as any other financial obligations, such as those toward pension plans. Stronger corporate balance sheets stand out at a time when government and consumer finances remain shaky.

Murat Tasci, Cleveland Fed: Are Jobless Recoveries the New Norm? Ultimately, whether we have a muted, jobless recovery or a rapid one featuring full employment gains will depend on the demand for labor. The unemployment rate is stabilizing, but unfortunately, the demand for workers has not been showing any signs of major improvement yet. Of course, some kinds of slack might exist that prevent rising demand for labor from translating immediately into new jobs. Employers could potentially ask for more hours from their current employees before hiring new workers. Similarly, part-time employees can be made full-time workers. A good measure of this potential slack is the number of workers employed part-time for economic reasons. Significant underemployment could be a major contributor to a jobless recovery.

Mark Vitner, Wells Fargo: Reflections on 25 Years Following The U.S. Economy. Over the past 25 years the greatest forecasting mistake economists have made is to underestimate economic growth. Paying too much attention to all the negatives in the economy tends to make economic forecast too pessimistic. Forecasters tended to overestimate the drag from federal budgets deficits during the late 1980s, the banking crisis in the early 1990s, and most of the subsequent crises that we faced during the past two decades. Many forecasters were also slow in recognizing that the potential growth rate of the economy had increased in the late 1990s with the advent of new information technologies.

Yener Altunbas, BIS: Does monetary policy affect bank risk-taking? This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls.

Joyce M. Dargay, Dermot Gately, NYU: World oil demand’s shift toward faster growing and less price-responsive products and regions. World oil demand has shifted toward products and regions that are faster growing and less price-responsive. In contrast to projections to 2030 of declining percapita demand for the world as a whole – by the U.S. Department of Energy (DOE), International Energy Agency (IEA) and OPEC – we project modest growth. Our projections for total world demand in 2030 are at least 20% higher than projections by those three institutions, using similar assumptions about income growth and oil prices, because we project rest-of-world growth that is consistent with historical patterns, in contrast to the dramatic slowdowns which they project.

Paul M. Romer, NBER: Which Parts of Globalization Matter for Catch-up Growth? Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas. Traditional trade flows are an imperfect substitute for flows of the underlying ideas. The simplest textbook trade model shows that a welfare-enhancing move toward freer flows of ideas should be associated with a reduction in conventional trade. The large quantitative effect from the flow of ideas is evident in the second half of the 20th century as the life expectancies in poor and rich countries began to converge. Another example comes from China, where authorities dramatically reduced accident rates by adopting rules of civil aviation that were developed in the United States. All economists, including trade economists, would be better equipped to talk about international flows of technologies and rules if they adopted a consistent vocabulary based on the concepts of nonrivalry and excludability. An analysis of the interaction between rules and technologies may help explain important puzzles such as why private firms have successfully diffused some technologies (mobile telephony) but not others (safe municipal water.)

Pierre Koning, Carolyn J. Heinrich, IZA: Cream-Skimming, Parking and Other Intended and Unintended Effects of Performance-Based Contracting in Social Welfare Services. We analyze the incentive effects of performance-based contracts, as well as their impacts on provider job placement rates, using unique data on Dutch cohorts of unemployed and disabled workers that were assigned to private social welfare providers in 2002-2005. We take advantage of variation in contract design over this period, where procured contracts gradually moved from partial performance-contingent pay to contracts with 100%-performance contingent reward schemes, and analyze the impact of these changes using panel data that allow us to control for cohort types and to develop explicit measures of selection into the programs. We find evidence of cream-skimming and other gaming activities on the part of providers but little impact of these activities on job placement rates. Overall, moving to a system with contract payments fully contingent on performance appears to increase job placements for more readily employable workers, although it does not affect the duration of their jobs.

Douglas Almond, Janet Currie, NBER: Human Capital Development Before Age Five. Events before five years old can have large long term impacts on adult outcomes. Several longitudinal studies suggest that characteristics that are measured as of age 7 can explain a great deal of the variation in educational attainment, earnings as of the early 30s, and the probability of employment. Child and family characteristics measured at school entry do as much to explain future outcomes as factors that labor economists have more traditionally focused on, such as years of education. Yet while children can be permanently damaged at this age, an important message is that the damage can often be remediated. We provide a brief overview of evidence regarding the effectiveness of different types of policies to provide remediation.

Paul J. Burke, Andrew Leigh, IZA: Do Output Contractions Trigger Democratic Change? Does faster economic growth increase pressure for democratic change, or reduce it? Using data for 154 countries for the period 1963-2007, we examine the short-run relationship between economic growth and moves toward and away from greater democracy. To address the potential endogeneity of economic growth, we use variation in precipitation, temperatures, and commodity prices as instruments for a country’s rate of economic growth. Our results indicate that more rapid economic growth reduces the short-run likelihood of institutional change toward democracy. Output contractions due to adverse weather shocks appear to have a particularly important impact on the timing of democratic change.

Pierre Brochu et al, University of Ottawa: The ‘Trendiness’ of Sleep: An Empirical Investigation into the Cyclical Nature of Sleep Time. Using Canadian time use data, we exploit exogenous variation in local unemployment rates to investigate the cyclical nature of sleep time and show that for both men and women, sleep time decreases when the economy is doing relatively better. Our results suggest that in a recession Canadians sleep an average of 2 hours and 34 minutes more per week, or 22 minutes more per day. Given the importance of even small changes in sleep time on measures of cognitive functioning such as reaction time and concentration, our findings may help explain the countercyclical nature of mortality. Further, we find that sleep time should not be treated as exogenously determined, but, like any other resource, determined by its relative cost.